Public Storage (PSA), Extra Space Storage, Inc. (EXR), Sovran Self Storage Inc (SSS): How Technology Helps This Sector Outperform the S&P 500

” … I would like to challenge someone on this call to write a very thoughtful piece on the Self Storage sector to paint us with the different brush.” — CubeSmart (NYSE:CUBE) CEO Dean Jernigan Aug. 9, 2013

Challenge accepted.

Mr. Jernigan was trying to point out that self-storage REITs will perform well in a rising interest rate environment that is expected to result from the Federal Reserve tapering of quantitative easing. In fact, it appears a well managed self-storage REIT can perform well in almost any economic environment. Here are some reasons for this sector’s success.

You might think technology and self-storage go together as naturally as Tesla Motors Inc (NASDAQ:TSLA) and buggy-whips. If so, you’d be wrong. The incredible five year outperformance of Public Storage (NYSE:PSA), Extra Space Storage, Inc. (NYSE:EXR), CubeSmart (NYSE:CUBE), and Sovran Self Storage Inc (NYSE:SSS)  vs. the S&P 500 index happens to coincide with the rapid growth of customers shifting from the Yellow Pages to the Internet in deciding where to store their stuff.

PSA Total Return Price data by YChart.

The transition in the storage industry is similar to how Zillow Inc (NASDAQ:Z), Trulia Inc (NYSE:TRLA), and Move Inc. (NASDAQ:MOVE)‘s Realtor.com have become many people’s first step in searching for housing. But the story gets even better when you take a closer look at demographic trends, lack of new construction in urban markets, and the ability to systematically raise rents on short-term leases.

Here’s one way technology is helping the bottom line
During a June 5, 2013 REIT Week presentation, Extra Space Storage, Inc. (NYSE:EXR) CEO Spencer F. Kirk shared how the Internet has become “the great divider.” As little as five years ago, “the Yellow Pages and drive-ups” were the primary ways to reach customers. Today, Kirk noted, “over 60% of Extra Space customers use the Internet and mobile devices during the decision process.” Kirk also shared that “the larger more sophisticated operators have a tremendous advantage — on average, we spend more than $34,000 per day on interactive marketing.” That is roughly $12.4 million per year being spent for branded websites, call centers, SEO, and pay-per-click advertising.

Public Storage (NYSE:PSA) CEO Ronald L. Havner reinforces how critical Internet marketing has become for the big players in self-storage: “Now, the Internet and mobile telephones have replaced the phone book. In 2012, we spent over $15 million with Google.” This is a huge advantage compared to private owner-operators, who don’t have the resources to compete for the customer.